Truant Monsoon and India’s Growth Prospects

13 Oct 2023

The deficit in rainfall continues as we inch closer the end of the southwest monsoon season, which runs from June to September and provides over 70 per cent of India’s annual rains. 

The season is crucial because only 52 per cent of India’s gross sown area is irrigated. 

Overall, rains up to September 12, 2023, are 10 per cent below the long period average (LPA), which puts it in the deficient category. 

Equally worryingly, their distribution over time and geographies has been patchy with some parts of the country getting excess rains and others very little. 

To be sure, some abnormality in the rainfall pattern is a norm now rather than an exception. The good part is this has not had any meaningful impact on agricultural output or inflation. For example, agricultural GDP growth has been healthy in the past four fiscals despite the uneven distribution. 

Foodgrain production rose steadily and is estimated to have it a record high in 2022-23. Farmers seem to be gradually adjusting their sowing patterns over time, according to monsoon conditions. 

But this fiscal is a bit different from the past four due to the development of EL Niño conditions which are associated with dry conditions. Additionally, the backdrop has been of high food inflation. Of the six El Niño years since 1991, agricultural growth was negative in four, and retail inflation was above 6 per cent in only three. 

The august rainfall this year at 36 per cent below LPA was the weakest in 123 years. 

This kharif season, sowing has been the weakest for pulses (-8.6 per cent lower than last year as on September 9). In contrast, sowing picked up for rice (2.7 per cent). 

With overall sowing at last year’s levels, the rains in rest of the season become critical for protecting the yields of crops that have been sown.

CRISIL measures the impact of monsoons via its proprietary index Deficient Rainfall Impact Parameter (DRIP) as rainfall data does not tell the complete story. DRIP measures the impact by combining the shock that arises deficiency in rain (measured as deviation from LPA) with the vulnerability of region (measured as irrigation buffer). 

In terms of precipitation, among major states, rains have been deficient in Bihar (-27 per cent below the LPA), Jharkhand (-33 per cent), and Kerala (-41 per cent). But when measured via DRIP, Jharkhand, Maharashtra, Madhya Pradesh, and Karnataka show high vulnerability. 

With El Niño conditions getting entrenched, rains in the rest of the season have become crucial to lift agricultural output and rural demand and subdue inflation. 

Although inflation spiked to 7.4 per cent in July and remained above 7 per cent in August, this was largely localised to food. In July, food inflation rocketed to 11.5 per cent, whereas fuel and core fell 3.6 per cent and 4.9 per cent, respectively. In August headline inflation came down to 6.8 per cent with food inflation at an uncomfortable 9.9 per cent. 

If we take food out, headline inflation was 4.8 per cent in both July and August. Food inflation is, therefore, the major worry. Within food, while the spike in vegetable prices is correcting, that in foodgrains (cereals and pulses) remains in double digits. 

Even if food inflation is localised right now, the Reserve Bank of India (RBI) will have to keep its eyes peeled for developments on this front. If sustained, food can become a concern because it can then spill over to other components and steer the headline CPI inflation above the RBI’s target. And this can constrain monetary policy as central banks do respond to inflation when it starts becoming generalised. We have raised our inflation forecast to 5.5 per cent for this fiscal from 5 per cent earlier.

The GDP growth is expected to slow to 6 per cent in the current fiscal from 7.2 per cent in the last fiscal as the lagged impact of 250 basis points rate hike from RBI will be felt in the second half when the global slowdown is expected to intensify. India’s merchandise exports have been contracting for last six months and this will continue through the rest of the fiscal. 

Monsoon performance, therefore, adds another risk to output and inflation. If rains remain suboptimal in rest of September, some adverse impact on agricultural GDP and overall GDP too can play out. And if inflation stays high, interest rates too will stay higher for longer.

Rains also influence ground water and reservoir levels for the rabi crops, which are largely irrigated. On a positive note, the Indian Metrological Department expects the rains to improve September. But till September 12, cumulative rains were deficient. Fingers crossed for rest of the season, therefore.

This article is by Mr Dharmakirti Joshi, Member, CII Economic Affairs Council & Chief Economist, CRISIL. 

It was first published in the October 2023 issue of CII ARTHA, focused on the theme,‘Vagaries of Monsoon: Impact on India’s Growth Prospects’.